Tax Notes Quotes Mark Allison on Professional Golfer's Endorsement Income Allocation

Mark D. Allison is quoted in Tax Notes regarding a recent Tax Court case involving professional golfer Sergio Garcia and how the court resolved the allocation of income issues involing royalties.  For more on the story, please go to Tax Notes's website.
 
Excerpt taken from the article "Golfers Help Resolve Endorsement Income Allocations" by Marie Sapirie for Tax Notes.  Reprinted with the permission of Tax Notes.

 Wearing logo-emblazoned clothes, using branded equipment, making appearances at promotional events, and lending one's image to print and video advertisements are practices that have not changed much since 1983. Determining the correct allocation in an endorsement agreement is certainly a fact-intensive inquiry that may continue to be litigated even after the analytical rubric has been established, but the court's footnote may have inadvertently left a larger than necessary opening for taxpayers to argue that the analysis in Garcia and Goosen does not apply to them.

The Garcia footnote is also odd because all three opinions were designated as Tax Court opinions, rather than memorandum opinions. The Tax Court opinion designation suggests the court saw an important legal issue or principle in the case, in contrast to the memorandum opinion designation, which is for cases in which the law is settled or factually driven. Mark Allison of Caplin & Drysdale said, "There is nothing particularly unusual about [ Garcia ] insofar as it is a valuation case." He suggested that the court might have made the designation to acknowledge that valuing name and reputation is difficult, as is differentiating that from pure compensation for services.

In Goosen, the IRS agreed that off-course endorsement income is royalty income. But Garcia does not bisect the contract into on-course and off-course components. It is not clear why the court did not go down that path given the direction from Goosen, said Allison. Off-course endorsement income should be nearly exclusively royalty income because the sponsor is seeking the benefits of the player's name and reputation, but for on-course endorsements such as wearing a logo on a shirt or playing with branded clubs, there is "at least a question to be resolved whether the player is providing something more akin to personal services because you have to be wearing [the clothes] and playing in tournament to get the fee," he said. Endorsement contracts should be capable of being broken down into on-course and off-course components, including success or incentive bonuses. If Garcia wins a major wearing the logo, he would typically get a bonus, and the inclination is to view that fee as compensation for services even though the sponsor typically gets a substantial boost because the enhancement of the player's reputation as a result of the win, but these nuances were not addressed in the opinion, said Allison.

Goosen and Garcia have broad implications in terms of how to think about valuing an individual's name, said Allison. Although the number of athletes who may have contracts like those at issue is small, both opinions highlight the attributes involved in valuing an athlete's identity, he said. Athletes should reevaluate their endorsement agreements and possibly get an appraisal that includes an allocation between on- and off-course income and that explains more clearly where the value of the contract lies, Allison said.